The Color of Money: Payday Loan Industry Polishing Its Image

The Community Financial Services Association of America, the
national trade association for payday lenders, is planning to spend $10
million for an advertising campaign that it says is intended to educate
people on how to use payday loans wisely.

Payday loans are small loans that a borrower promises to repay out
of his or her next paycheck, typically in two weeks. A $100 loan might
carry a fee of $15.

Consumeradvocacy groups are highly critical of these loans because
when the fees are annualized, they often amount to triple-digit
interest rates — even more than 1,000 percent in some cases. The
groups argue that the loans take advantage of cash-strapped
consumers.

"This is a public relations act from an industry under heavy fire,"
says Jean Ann Fox, director of consumer protection for the Consumer
Federation of America. "This is a move to derail state and
congressional legislation."

Payday lenders were banned from Georgia in 2004, although lawmakers
there are considering letting them back in. Other state legislatures
are considering restrictions on payday loans. Last year Congress passed
a law forcing the industry to cap at 36 percent the annual interest
rates on loans to military service members and their dependents.

Industry executives say their multimillion-dollar campaign is not an
image booster. Rather, they call it an effort to encourage consumers to
use payday advances in a responsible manner. They argue that payday
loans are the more affordable route for people who find themselves in
desperate need of money.

"If it only cost $10 to bounce a check, I'm not sure we would
have nearly as big a payday loan industry," says Don Gayhardt,
president of Dollar Financial Corp., a payday lender. "Payday loans are
not predatory. We enhance the economic well-being of people."

In fact, to show its commitment to helping people, the trade group
is asking members to voluntarily implement new practices. The most
notable is an extended payment plan for those borrowers who cannot
immediately pay back their loan. At no cost, borrowers would be allowed
to repay the loan over four pay periods. For example, if a customer is
paid every two weeks, he would get an additional two months to pay off
the loan. If paid monthly, he would get an additional four months.

I have no doubt the media campaign will be successful. The ad I
viewed, which features Darrin Andersen, president of the CFSA, has soft
music and shows a child with his arm in a sling and a man on the side
of the road with a car obviously in need of repair. The subliminal
message: If you need money to fix your kid's arm, we're here
for you. If your car breaks down and you don't have cash, come to
us.

Andersen advises that people should use payday advances only for
unplanned short-term expenses. Borrow only what you feel you can
comfortably repay, he says.

Using a credit card to buy things you can't pay off the next
month is bad enough, but to borrow against your next paycheck is the
very definition of irresponsibility. It's an incredibly unwise
financial move.

Unbelievably, several minority groups have partnered with CFSA to
promote financial literacy. Why would they do this, I wondered,
especially when so many payday storefronts are located in economically
depressed minority neighborhoods?

Well, it turns out there's money in it for the minority
groups.

CFSA is giving about $2 million to fund financial literacy programs
for two groups, according to its spokesmen, Steven Schlein.

The trade association is partnering with the National Conference of
Black Mayors to host summits "to teach young people the importance of
building a solid financial future." I certainly hope it's a future
that never involves a payday loan.

CFSA also is teaming up with the National Black Caucus of States
Institute. As the trade group says in its release, the partnership will
"educate African-American legislators and community leaders on critical
issues regarding consumer credit, and provide community volunteers with
resources they need to educate consumers in their communities on how to
become credit savvy."

Clearly, the savvier one is the payday industry.

What better way to try to fend off regulation than to partner with
minority groups supposedly looking out for the very people their
opponents say the industry is taking advantage of.

But the payday lenders are right about one thing. They are providing
a service the people want. Just last month 15 million people took out
payday loans, according to Gayhardt.

"I think consumers understand the bargain they get with a payday
loan," he said.